GUEST BLOGGER

James Murdoch, News Corporation’s deputy chief operating officer, found his career implode shortly after his testimony in front of Parliament was disputed by two high-level News Corp. executives. According to the executives, Murdoch knew that the hacking was a more pervasive problem as early as 2008. Perjury aside, the corporate governance concern has to be the lack of adequate investigation and response employed by Murdoch. Rather than launching a full investigation into the hacking as he had claimed, News Corp. underwrote only two limited-scope investigations. The first in 2006 was a preliminary investigation in the wake of the reporter’s arrest. The second investigation, supposedly more expansive, took place in 2007 in response to a wrongful termination lawsuit by the shady reporter; that investigation involved questions focused on just five staffers related to the terminated reporter.

Lack of adequate investigation into suspected fraud has been at the center of other recent board director woes; specifically, infoGroup Inc. and DHB Industries. For infoGroup, audit committee chairperson Vasant Raval was prosecuted for inadequately investigating fraud. In response to allegations of self-dealing by the CEO, Raval conducted a one-man investigation that lasted just 12 days. According to reports, the audit committee chairman did not look into the CEO’s expenses. With DHB Industries, the SEC charged three ex-directors who served on DHB Industries Inc.'s audit committee for being "willfully blind to numerous red flags" of fraud.

The SEC has come out and said that it does not wish to concern the majority of hard-working board directors: "We will not second-guess the good-faith efforts of directors. But in stark contrast, Krantz, Chasin and Nadelman were [DHB Industries] directors and audit committee members who repeatedly turned a blind eye to warning signs of fraud and other misconduct by company officers," said Robert Khuzami, director of the SEC's Division of Enforcement.

What can be learned from these recent scandals involving News Corporation, infoGroup Inc. and DHB Industries is that board directors and audit committee members must be strident in their investigations into allegations of fraud and devote adequate resources to address fraud, known and unknown.

Even if we were to believe that Brooks did not know of any specific bribes, her statement in 2003 indicates that she was savvy enough about the tabloid journalism industry to know that juicy tidbits often come at a price. As Brooks ascended the, ranks in News of the World, one would reasonably assume that she knew darn well the origins of salacious details that would later bubble up from her staff that are at the center of the current hacking scandal.

Brooks has been arrested, without charges filed at the moment, and has resigned. Aside from the outcome of Brooks individually, the higher lesson of the News of the World case is that tone at the top dictates the course of an organization. News of the World follows in the embarrassing footsteps of other organizations that have previously enjoyed the public trust, specifically Hewlett-Packard and Berkshire Hathaway.

In the case of HP, board chairman Patricia Dunn worked through intermediaries to obtain phone recordings of other HP board members and nine journalists. This scandal was the first of many blunders HP shareholders had to endure, including the misguided ‘leadership’ of Carly Fiorina who questioned the very premise of the honored and revered ‘Bill and Dave Way’ that made HP a legend and, later, the ethical violations attributed to the now-departed Mark Hurd.

As for Berkshire Hathaway, this corporate scandal involved the use of insider information by heir-apparent David Sokol. While Warren Buffett had specifically prohibited the practice of inner circle management proposing investment in a particular company for which a senior staffer had an existing or imminent financial interest, Sokol just couldn’t help himself. He went right ahead and bought a stake in Lubrizol prior to Berkshire Hathaway taking a $9 billion stake in the company. While Sokol’s actions were shameful, Buffett took a share of the blame in the public eye when he was less than forthcoming in initial press dealings as to the reasons for Sokol’s unexpected departure.

Left unchecked, poor ethical practices are likely to recur in organizations that have suffered at least one ethical breach. As such, Rupert Murdoch must be tireless in the coming days, weeks and months to assert affirmative control over the ethical leadership of his many other enterprises to ensure that such shameful events do not recur.